In London the technology-focused side of a smallish private equity fund is run by a guy we shall call Mike. Mike’s been around a long time. His real name, and the fund he works for, are recognisable but not world-famous. And yet, he has a big advantage.

Back in 2001, when the very first iPods hit the shelves, Mike did a smart and generous thing. These devices were only available in the US and even there they were not easy to come by. Mike used his connections to buy a box load and promptly distributed these new toys among all the senior tech bankers and deal brokers in London. People remember things like that. A senior tech banker in Asia complains about the treatment he gets from all the big, global names in private equity – they sometimes cancel meetings at the last minute, yawn or just walk out in the middle of presentations. So when it comes to making initial calls to investors about opportunities, there is one name always near the top of the list.

“It’s just human nature that you’re going to call [Mike] first,” the banker says.

The iPod retailed for about $399 in 2001 – not insignificant for many people, but tiny in terms of the financial rewards bankers and investors get from doing deals. The iPod had a scarcity and novelty value that made it worth more than its sticker price. Still, it was a relatively small thing in the cycles of doing business. Crucially, it also preceded the 2010 UK Bribery Act.

So how far a jump is it from here to offering a job to the offspring of someone with whom you wish to do business? This is a question vexing bankers in Asia at the moment where JPMorgan is under investigation by US authorities because it may have handed jobs to the children of important government-related officers to win particular pieces of business.

Under the US Foreign Corrupt Practices Act, it is illegal to offer any inducement to officials of a foreign government to gain competitive advantage. The US law does not apply to paying inducements to people at private companies, which from a practical point of view seems odd because the process of hiring the chairman’s daughter is the same.

JPMorgan has walked away from a role in the upcoming $1bn equity listing of Tianhe Chemicals because the chairman’s daughter previously worked at the bank. But Tianhe is private, so strictly speaking the FCPA could not have been broken.

UBS, where the daughter now works, more recently won a role on the deal. It is not walking away. It has, however, just suspended two local bankers involved in the daughter’s hiring, but this is only because the bank is investigating whether there was a breach in the specific protocol of the hiring process, according to people familiar with the bank. Under Swiss law, bribery of private persons comes under unfair competition law – and it is not a bribe if of minor value in conformity with social custom.

So what is the value and the custom? The cost of gifting a two- or three-year contract as a junior banker could be anywhere between a few hundred thousand dollars and well over $1m, depending on the success of the person. That’s quite a lot of money. But then again, how much would a bank spend on dinners, tickets to sporting events, flying the chief executive to, say, Shanghai for personal face time, or even reportedly on debentures to coveted private schools, all in the purpose of trying to seduce a client?

And what is gained? In Hong Kong stock market listings pay lower fees than many in the US and those fees are spread among more banks – the record is more than 20 on a single deal. Many banks only get a spot if they can exploit another relationship and turn up with a committed investor.

The culture of gift giving and favours is still much stronger in China than the west – hard cash changes hands regularly at weddings, in the office, and in people’s homes, usually in bright red envelopes. The culture of guanxi, or social links, is extremely important, too.

Gifts are always meant to create social bonds and obligations – check out The Gift by French sociologist Marcel Mauss.

An immediate and final exchange should not create a lasting social tie – that is a perfect market transaction. However, it is almost impossible to separate gifts, favours and relationships from any exchange, especially in Asia – and Mike’s story shows even small gifts have a long impact.

So, is hiring the bright young offspring of chairmen or women when there is any kind of continuing relationship ever OK? Good compliance on one side might not stop the other believing a favour was granted. Proving that any single gift or favour secured a particular deal is very hard. Almost as hard as freeing economics itself from the foibles of human nature.

Paul J Davies is Asia Financial Correspondent

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